It is not a secret that when a market is performing well, the first thing that is happening is that it gains the confidence of the investors. That is the first and most tricky catch that is happening. People, “drunk” from the smell and feeling of profits relax, they forget all the market and investment basic rules and one day they have to realize that the beautiful dream is becoming a nightmare. The profits are becoming loses and the market’s “gravity” is making the indexes go down extremely fast, usually faster than they used to go up (known as “free fall”).
It is vital for every investor to know and always remember the number one rule of investments. With any market that looks solid and secure, we have to remember it has the same chances to fluctuate as any other market (It is not if … it is when this will happen). Timing is one of the most important parameters when it comes to taking investment decisions and we must be ready to get in as well as to get out of the market before it is too late.
Usually when house prices rise because people gorge themselves on debt, or because they decide to invest all their life time savings, the ensuing recession tends to be particularly deep and long. Over-leveraged households cut their consumption drastically. Output and employment collapse, and that could lead to an economic collapse which is essentially a severe version of an economic depression, where an economy is in complete distress for months, years or possibly even decades.
So when we are involved with real estate investments (or any other investment) we must always be under alert.
We cannot predict the future but we can always learn from the past in order to see as soon as possible the signs of the market. We need always to remember that markets fluctuate and try to read the signs.
A very good example is the UAE – Dubai Real estate market.
After six years of unprecedented price increases, the UAE housing market crashed in 2008.
Residential property prices in Dubai, measured by the proprietary property price index of Morgan Stanley, dropped 25% in Q4 2008 from the previous quarter. High-end apartments and villas were the worst-hit, with prices falling 35% in Q4 2008 from their peak in Q2 2008, according to Morgan Stanley. Apartment prices in Downtown Burj Dubai fell 28% q-o-q to AED2, 700 (US$736) per sq. ft. in Q4 2008, according to Global Investment House. In Dubai Marina, house prices have declined by 18% to AED1, 800 (US$490) per sq. ft. over the same period. In the Palm Jumeirah, the value of villas and apartments dropped by as much as 60% in just a few months.
In October 2008, Taylor Scott International’s analysts and all those following the market in Dubai noticed an unusual calm. For six years, the market had enjoyed a housing boom, where everyone involved with Real estate was making money. And everybody had become well-versed in the rationalizations for why the housing bubble wouldn’t collapse (i.e., “it hasn’t crashed so far”, “the government wouldn’t allow it”, “Dubai is a unique Market”, etc.). That had all ended the month before (September 2008) when housing prices unexpectedly began to fall. And what followed was a similar very quiet situation, like everyone was rethinking and holding their breath. Real estate developers were cutting prices. Banks were pulling back on lending. It’s like everyone had stopped (or at least slowed down) the real estate game they had been happily playing for the past decade(s) and are quietly re-assessing the situation.
A wait-and-see approach among homebuyers has caused a large decrease in demand for properties, which has prompted several developers to delay or cancel construction projects. Meanwhile, expatriates going back home, because work was drying up in the emirates. Interest rates increased and LTV ratio ( Loan to Value Ratio = Mortgage Amount/ Appraised Property Value ) reductions had been imposed by banks and other mortgage providers, exacerbating the situation.
By December 2008, (in just 4 months) prices for new Dubai developments had dropped 40%. Real estate stock prices were in free fall. The market could not resist and at the same time rents and yields were falling. Even the rental market was cooling. Homeowners and developers unable to sell properties were renting units out, causing the supply of rental houses to rise sharply. Rents for residential properties dropped 25% in 2008 from the previous year, according to Taylor Scott International’s research. Dubai’s most prestigious locations, like Downtown Burj Dubai and Palm Jumeirah, were the worst hit, with rents plunging as much as 33%.
Rental yields in Dubai registered a big decrease from around 8% to 5% in 2008 from a year earlier, according to research conducted by Taylor Scott International. Bigger apartments tend to generate lower yields, at 4.50% for 180-sq. m. apartments. On the average, Dubai apartments had yields of around 5.52%.
Publications such as the Economist were leading with headlines like “Has the Bubble Burst?” The calm was over and everyone was starting to take action.
In January 2009, foreigners began to leave the country in droves, abandoning their leased cars at the airport by the thousands. State-backed real estate companies began to realize they were facing massive lay-offs. Many real estate developers realized they weren’t going to be able to survive their debts at current housing prices. And the overall government debt at 150% of GDP suddenly went from a theoretical to a very real problem. The Market Crashed.
By July 2009, Dubai was a ghost town. The roads were no longer congested. It no longer took an hour to get across town. The restaurants and malls were spooky-quiet. Hotels were 50% cheaper than the year before. And apartment prices continued to drop by a cumulative total of 60% over the next year. The city would subsequently spend the next 3-4 years working out its debt and housing supply situations.
The Real Estate Market in Dubai collapsed in 2008. Last year, after 6 years, Knight Frank named Dubai the world’s best performing real estate market during 2013 with price growth nudging 35 percent in a year!
This is the reality of the markets around the world. Whatever goes up will go down and vice versa. It is critical for investors to be able to understand the signs of a market .The macroeconomics of the country as well as the regional and global economic variables are very important in order to take decisions concerning investments. For example, when the CBR is increasing usually the real estate markets are cooling down as lending becomes more expensive. Inflation and currency devaluation are also effecting the real estate market trend. Successful investments require investors who are following up the markets and know how to identify the signs. Remember every time someone is making money, someone else is losing .Depending who you want to be you have to prepare yourselves properly. You need to have a plan A and a plan B if something goes wrong. You need to know your entry and exit points (both in good and bad case scenario). Based purely on luck and rumors someone can temporarily make money but at the end will lose. In Kenya, for the last months it is obvious that there are signs that should make us start thinking and be more careful when it comes to our existing or new real estate investments. The market had been outperforming for several years, but according to the last KBA house price index report things are not really booming. On top of the slowdown of the market the first months of 2015 noticed by the KBA ,if we add the 3% increase of the CBR (June and July 2015 and another possible increase if the Kenyan Shilling will not start to gain its value back soon), the almost 15% devaluation of the currency, inflation, unemployment, the terrorism factor which unfortunately is still not completely defeated, the European crisis, the major crisis in China,(china is one of the key investors in Kenya, not only in real estate but almost in each and every sector of the Kenyan economy), it looks like there is plenty of material for anyone involved in the market to start analyzing his position and maybe time to make some decisions. A possible decrease of the real estate market in Kenya does not mean that the market will not eventually recover. As I said all markets fluctuate. Markets usually operate in circles, it is not about Kenya, France, Dubai China or any other specific market. This is a basic rule that applies around the world. Smart investors buy when the markets are down and sell when the markets are up. And this is how successful real estate investments have to be operated.
As a conclusion I want to repeat that I believe that knowing the above we should not relax nor panic. Markets fluctuate and in order to keep making money by investing in Real Estate we must always be prepared, keep doing continuously research, analyze the markets, stay alerted and follow the markets.
Kioleoglou Kosta Civil Engineer,
Director of Engineering and Property Appraisal.